‘Look the manager straight in the eye,’ say selectors

Despite staging a comeback in many portfolios, as low yields elsewhere fuel the need for returns, hedge funds still face demands for trust, transparency and track records.

“I expect the hedge fund and absolute return industry to raise another $500bn over the next ten years.” Even as Marcus Storr, head of hedge funds at Feri, warns of some pitfalls of hedge fund investing, he is sure that investment managers will have to turn to them to find diversification and returns.

“Pension funds and insurers have to earn 4%-4.5% to cover their liabilities, but they earn only a fraction investing in government bonds,” he says. “At the same time, boosting the equity allocation increases volatility, so they have to look to alternative investments, hedge funds and absolute return strategies.”

The recent growth in assets shows that hedge funds have regained some trust among investors. According to recent data, the industry has experienced inflows since 2010 (see chart, below).

The dire conditions in many bond markets have increased the interest of selectors in German family offices, insurers or pension funds in the hedge fund industry, Storr observed at the first Hedgefonds Investmenttag, organised by Feri which, besides its ratings business, has more than €20bn of assets under management: “Many clients, who never had anything to do with hedge fund strategies, have started to look into the market.”

Allocation rethink

Especially in Germany and Austria, where the investor base still is sceptical of unregulated offshore funds, there has been a rethink.

Dirk Rüttgers, director at asset manager Do Investment, emphasises that hedge fund investments still raise eyebrows at many family offices and advisory boards. During a discussion session, he complained that investment managers still have to do a lot of persuading. Given the complex matter of investing in hedge funds, from manager selection to tax issues, he recommends getting external advice to improve allocation towards hedge funds.

Stefan Löwenthal, investment manager at Macquarie Investment Management in Vienna, agreed that smaller firms cannot carry out the whole manager selection process on their own. “But what remains central is to understand the idea and strategy of a hedge fund manager each step of the way,” he said.

Many participants in the hedge fund conference invoked the issue of trust. Rüttgers said: “It is key to see the managers; to get to know them; to look them straight in the eye.”

He added a criterion widely shared among Germany and Austrian selectors: “I favour managers who have money invested in their own funds.” Ulrich Voss, investment manager at Black Horse Investments, went even further: “We choose products only in which managers themselves are invested.” For Storr, this was simply “a guarantee that the manager will do anything within his power to preserve the wealth that is invested in the fund”.

It was Gideon King, CIO and CEO of hedge fund Loeb Capital in New York, who warned investors at the conference in Bad Homburg not to be naïve about hedge fund investing. “We are overpaid. There is a compelling profit motive in the industry. But, at the same time, the average hedge fund lasts only for three to five years,” he said.

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